Financial Repression in a DSGE Model with Financial Frictions

Mariia Elkina () and Sergey Pekarski

HSE Economic Journal, 2020, vol. 24, issue 4, 475–502

Abstract: To explore the role of financial frictions for macroeconomic policy transmission, this paper compares macroeconomic effects of tightening financial repression in the standard medium-scale DSGE model which assumes perfect capital markets and the one with financial frictions. Introducing financial frictions into the model deepens negative impact of financial repression on private investment, it but leads to weaker initial negative response in output. This result is driven by two effects. Firstly, in the model with financial frictions, investment is more sensitive to changes in the economic activity because negative shock worsens financial health of entrepreneurs and leads to tighter borrowing conditions. Secondly, in the model with financial frictions, the problem of households who consume and save and that of entrepreneurs who invest in capital are considered separately. Financial repression reduces return on capital, which further worsens financial stance of entrepreneurs, but does not impact return received by creditors because it is fixed in the contract. Hence, the impact of financial repression on households and their consumption is smaller in the model with financial frictions. In the consumption-led economy the overall effect on output is less prominent if we model financial market explicitly. Quantitatively, this effect can be quite substantial, so we conclude that analysis of financial repression effects calls for explicit modeling of financial market and its specific characteristics despite possible benefits of a simpler model. Furthermore, when compared to various distortionary taxation measures as a way to finance an increase in government purchases, financial repression produces lower fiscal multipliers.

Keywords: financial repression; fiscal policy; financial accelerator; financial frictions; general equilibrium model (search for similar items in EconPapers)
JEL-codes: E62 H63 (search for similar items in EconPapers)
Date: 2020
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://ej.hse.ru/en/2020-24-4/427830694.html (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hig:ecohse:2020:4:1

Access Statistics for this article

More articles in HSE Economic Journal from National Research University Higher School of Economics
Bibliographic data for series maintained by Editorial board () and Editorial board ().